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How Actively vs. Passively Managed European Funds Measure Up

Morningstar research reveals European equity funds and bond managers struggle to deliver over the long term

Dimitar Boyadzhiev

 

Success rates remain low for European stock-pickers: Few active managers have survived and outperformed their average passive peers, particularly in the largest equity categories. However, active funds have had more success in smaller categories such as the U.K. Mid-Cap Equity category. 

These findings are detailed in the latest European Morningstar Active/Passive Barometer, a semiannual report that measures the performance of actively vs. passively managed European funds within their respective Morningstar Categories. The barometer is unique in the way it measures active managers’ success relative to the actual net-of-fee performance of passive funds rather than an index, which isn’t investable. You can learn more about the methodology behind the report in our previous blog post, “Active vs. Passive Fund Management in Europe.” 

Here, we outline a few of the report’s key findings. 

5 takeaways about actively vs. passively managed European funds from our report: 

1. European stock-pickers’ long-term success rates are low. Most active managers both survived and outperformed their average passive peer in just two of the 66 categories we examined over the decade through June 2019. 

2. Over the 10 years through June 2019, active managers’ success rate was less than 25% in two thirds of the categories surveyed. This includes most core-holding categories except Emerging Markets, where the success rate is a little higher. This is demonstrated on the chart below, which maps out the one-, three-, five-, and 10-year success rates for several active equity funds. 

3. Survivorship rates are positively correlated with odds for success. The biggest driver of active funds’ failure is their inability to survive, which is often a result of lackluster performance. 

4. Comparing mortality rates between active vs. passive funds shows that the latter have better odds of survival over the long term. The contrast becomes even starker when looking even farther back. Consider the Europe Large-Cap Blend Equity category (shown on the chart below): Active and passive funds experienced similar survivorship rates over a one-year period (94.4% versus 93.9%, respectively), but over a 10-year period, the survivorship rate for active funds fell to 46.1% while passive funds remained at 60.3%. 

5. Active fixed-income managers’ success rates have also been low. Over the past decade, less than a fourth of active funds have managed to both live and outsmart their average passive peer in 11 of the 15 categories we studied. These funds’ success rates are shown on the chart below. 

Our research shows that most active managers’ long-term track records leave much to be desired. This report supports our findings that in general, actively managed European funds have failed to survive and beat their benchmarks, especially over longer time horizons. 

This blog post is adapted from research that was originally published inMorningstar Direct™. If you’re a user, you can access the full paper.If not, take afree trial

To explore the full analysis, download the European Active/Passive Barometer.

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The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate.

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Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. 

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